Microsoft is considering modernizing its 365 software suites based on artificial intelligence

Microsoft is considering a major overhaul of its important suite of software tools as part of an effort to make more money from its massive artificial intelligence investments, according to people familiar with the matter.

The plan focuses on Microsoft 365, a popular office software suite used by thousands of companies. The results could include repackaging AI features into existing licenses or creating a new, more expensive package that includes Copilot’s AI features, said one of the people with direct knowledge of the plan.

CEO Satya Nadella and his senior leadership team plan to conduct executive reviews this summer with “AI at Work” chief Jared Spataro’s team to decide how to package AI capabilities.

The goal is to finalize any changes before Microsoft’s sales teams return in September from a summer slowdown and start rolling out improved offerings, one of the people said. The people asked to remain anonymous discussing early private plans. The company did not respond to a request for comment.

Finding balance

Microsoft wants to strike a balance between increasing the use of AI tools while also increasing revenues and recouping some of the significant costs associated with building and launching these new features.

Several new Copilot AI features have been introduced this year. They have shown early promise, but the technical work required behind the scenes is extremely expensive.

Customers are eager to try the technology, but Microsoft insiders expect the conversation to change soon as users begin to analyze whether they’re getting a return on their AI investment.

Wall Street is also wondering how Microsoft will recoup its massive artificial intelligence spending. The company is stockpiling 1.8 million GPUs to create and run AI models and related products. It also has an astonishing plan to triple data center capacity, primarily to support AI workloads. Capex was a record $14 billion in the last quarter.

Big changes in the package

While nothing is set in stone yet, the discussions could result in a radical shift to Microsoft 365, which has maintained a similar pricing strategy for almost a decade.

This poses a big risk for the company because Microsoft 365 is an important source of revenue and growth, even without fancy new AI capabilities.

The software suite includes popular business applications such as Word, Excel and PowerPoint. It is part of Microsoft’s Productivity and Business Processes division, which generated about $20 billion in the last quarter.

E3, E5 and the mythical E7 pack

The 365 package is sold to business customers primarily in packages called E3 and E5. E stands for “enterprise”. The E3 is a more basic offering, while the E5 has more bells and whistles.

When the company first introduced these packages, it originally planned to eventually release an even larger and more expensive package called E7.

But this never happened. The problem was that Microsoft’s salespeople began to present E5 as the last business software package that customers would need to buy. This made it much more difficult for the company to charge more for the larger E7 package.

“It will always have everything Microsoft has until the end of time,” was the sales pitch, according to one person familiar with the situation. This person estimated that E5 currently brings in about twice as much revenue as E3.

The E7 suite has taken on something of a mythical status at Microsoft, with employees and vendors alike debating and guessing whether it will ever appear.

“Spiritual Successor”

The boom in generative artificial intelligence and Microsoft’s early lead have increased the chances of a new 365 suite arriving soon.

The summer executive review sessions could result in an AI-powered “spiritual successor” to the E7 package, one person familiar with the plan said.

Microsoft has new AI tools it can integrate with 365 and use them to convince customers to upgrade its software suite.

But it’s not just about artificial intelligence. Over time, Microsoft added new software and licenses that customers had to pay for – on top of the amount they already spent on the existing E5 suite.

Examples include Microsoft’s Viva employee engagement platform and premium versions of the Teams chat app and Sharepoint collaboration software.

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But the biggest catalyst for Microsoft’s talks about new packages is its Copilot AI assistant tool, which costs $30 per user per month. For comparison, the E5 license is available on Microsoft’s website and costs $54.75 per user per month.

Customers complain about the additional cost of this additional software. They also don’t like the added complexity of managing multiple software licenses – for example, supporting a standard E5 license along with a Viva license and another one for Sharepoint.

The introduction of Microsoft’s Copilot AI assistant and the recent separation of the Teams chat app from 365 suites have only made this situation worse.

A surprise for Teams

In 2020, Slack filed a complaint with European antitrust regulators over Microsoft’s inclusion of the Teams chat app in its 365 services. Microsoft recently spun off Teams as a concession to the European Commission.

The move came as a surprise to some Microsoft employees. “We wanted it to disappear with the EU,” said one person we knew.

Microsoft dealt with the change by slightly lowering the prices of E3 and E5 licenses and offering Teams as another paid add-on.

The company faces mounting antitrust issues when it comes to artificial intelligence, including over its relationship with OpenAI. It’s unclear how Microsoft plans to address these concerns when bundling its AI tools with other software, as bundling has been a source of antitrust issues.

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